Tech

Sprint aims to turn the corner with Palm Pre

Nation's third-largest wireless phone company still faces high hurdles

WASHINGTON (MarketWatch) - Sprint Nextel Corp. is betting heavily on the Palm Pre smartphone to revive its flagging reputation, but it won't be an easy sell.

The Pre, which goes on sale June 6, is the most highly anticipated device Palm has ever made, and will likely be the snazziest phone Sprint has ever offered. The new device gives both companies - neither a leader in its own industry - a rare chance to outshine the competition.

Yet Sprint
S, -2.53%
and Palm are battling more than just their main rivals. They are battling public perception. Few customers see them as a first choice when they shop - even if, as Sprint now argues, it's largely fixed the problems that hurt its business.

"Our problem is we're not bringing in the new customers and that's largely a brand issue," Sprint Chief Executive Dan Hesse said Tuesday at an investors' conference in Boston.

Enter the highly anticipated Pre. Compared to its rivals, Sprint has long been seen as an also-ran when it came to which company had the coolest phones. It was the last big U.S. carrier, for example, to offer the Motorola Inc.'s
MSI, -1.20%
Razr after it became the best-selling device in industry history.

The Pre has effectively tied the fates of the two companies together, though the stakes are much higher for Palm
PALM, +1.63%
The handset maker has seen sales of its other product lines whither away under competition from the iPhone and BlackBerry. Palm recapitalized two years ago as part of an effort to build a new wireless operating system from the ground up, and the Pre is the first device to use that system - the success of which will make or break the company. See related story on Palm.

Although the Pre is not critical to Sprint's survival, the carrier badly needs a big hit and a burst of good publicity, if only to change how it is viewed in the marketplace. Potential customers won't give Sprint a second look unless they become persuaded that the carrier is on the mend.

The Pre not only has a touch-screen like the iPhone, it includes a slide-out keyboard. The device also has features never before available on wireless devices, including the ability to open several programs at once and perform multiple tasks simultaneously. Sprint executives use words like "revolutionary" and "breakthrough" to describe it.

"If this phone comes off as advertised, it should repair the Sprint brand," said analyst Pat Comack, Zachary Investment Research. "It's been very damaged and the company can use a winner."

Holding the line

The Pre is largely targeted at a class of upscale customers known in the industry as postpaid subscribers, who sign up for annual plans and make more use of data and Internet services. They are the most profitable subscribers in the industry.

Sprint has lost more than 6 million postpaid customers in the past two years to rivals such as AT&T and Verizon Wireless, a joint venture of Vodafone Group plc
VOD, -1.55%
and Verizon Communications Inc.
VZ, -1.07%
Revenue fell in 2007 and 2008 and Sprint lost money in both of those years.

While Sprint's customer base has shrunk to 49 million from 54 million a few years ago, Verizon and AT&T
T, -1.65%
have pushed their subscriber totals to around 80 million each. Verizon Wireless, the nation's No. 1 mobile carrier, built its market-leading position by persuading customers it operates the nation's best network, an argument supported by several independent market studies.

AT&T's success stems in no small part from its exclusive right to sell the popular Apple
AAPL, -1.92%
iPhone.

The Pre is Palm's answer to the iPhone, the most innovative wireless device invented so far. Sprint has priced the Pre at $199 with a two-year contract and $100 mail-in rebate - putting the device at the same price point as the iPhone.

"Our expectations are very high for the Pre," said Kevin Packingham, Sprint's senior vice president of product and technology development, in an interview.

In a best-case scenario, the Pre would lead to an immediate and sharp reduction in the loss of postpaid customers, which totaled 1.25 million in the first three months of 2009. Sprint cannot regain full health until it starts to add postpaid customers.

Yet so far the trend has proven impossible to reverse. Sprint lowered prices, introduced the industry's first flat-rate price plans and heavily promoted another iPhone alternative, the Samsung Instinct. All to little avail.

"The Samsung Instinct was supposed to be a big deal, but it didn't stop customer losses," wireless consultant Jane Zweig of Shosteck Research Group pointed out.

The nation's worst recession in decades hasn't helped. Many consumers are looking to cut their wireless bills or have delayed the purchase of new phones.

Lingering concerns

Some analysts question the company's Pre strategy, saying Sprint should have priced the device lower in a more aggressive bid to gain market share. The company appears to be subsidizing the price of the Pre less than AT&T subsidizes the iPhone, they say.

"It's a great phone, but is it head and shoulders above any other device out there? I don't think so," said analyst Todd Rethemeier of Hudson Square Research. He also noted that Apple might release its third version of the iPhone this summer, stealing some of the Pre's limelight.

Doubts about Sprint's network is another obstacle for potential customers. Interruptions and dropped calls soared after the company's 2005 acquisition of Nextel and customers eventually fled in droves.

"A device is only as good as the network it runs on," said Kate Price, a market analyst at the firm Technology Business Research.

Shortly after he was hired as CEO in late 2007, Hesse launched a major campaign to repair Sprint's network. He and other executives have stressed repeatedly in recent interviews and public appearances that the company's network has never worked better.

Analysts acknowledge that Sprint has made significant improvement in the quality of its network, but as Price put it, "perception lags reality." The company's ever-shifting brand and advertising strategies haven't helped, critics say.

Sprint's Packingham said customers who come back to Sprint will like what they find. "Give us a try," he said. "Sprint is not the same company it was a few years ago."

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